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Moody's: Widening Deficit Foreshadows Decline in U.S. Fiscal Strength

With last year's deficit growing to $779 billion, Moody's Investors Service yesterday warned that the country's fiscal position is on a "gradual longer-term decline."

Moody's, one of the major credit rating agencies in the U.S., released a report (paywall) in light of the Treasury Department's announcement that the deficit had grown 17 percent from Fiscal Year (FY) 2017 to 2018. That increase was driven by the spending deal and tax cuts passed in the last year. The Congressional Budget Office (CBO) estimated in April that the FY 2019 deficit will reach nearly $1 trillion and never come below that level in the years following. Deficits are now projected to reach levels last seen during the Great Recession – and that's with the economy at or close to its potential.

As Moody's explains:

Recent tax cuts and increased expenditures, combined with ageing-related entitlement spending and higher debt-service payments, will drive deficits in the coming years. In the absence of policies to offset adverse fiscal dynamics, the federal debt burden will continue to rise and debt affordability will decline, resulting in an overall weaker fiscal position for the US sovereign, a credit negative.

While CBO's baseline forecasts debt held by the public to be 96 percent of the economy by 2028, Moody's has a more pessimistic (and possibly more realistic) view that current policies – such as the tax cuts set to expire in 2025 – will likely be extended, resulting in the agency estimating debt "will rise by around 30 percentage points by fiscal 2028, to surpass 100% of GDP" from today's 78 percent of GDP. Such a high debt burden would be unprecedented outside of the period just after World War II.